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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Sustainable product capital investment analysis

AutoSource Inc. designs and manufactures tires for automobiles. The company’s strategy is to design products that incorporate the full environmental impact of the product over its life cycle. This includes designing tires for fuel efficiency.

The technical team has determined that the tires manufactured with a silica blend will reduce road resistance. Thus, silica-blended tires will be significantly more fuel-efficient for the consumer, without compromising tire life. To produce the silica-blended tires, AutoSource will need to invest $5,000,000 in new equipment. It is expected that the new tire will be attractive to consumers and will result in increased tire sales. However, sales of conventional tires will be reduced as a result of the new silica-based tires. To evaluate the project, the cost and prices of silica and conventional tires are estimated as follows:

  Silica Tires Conventional Tires
Sales price per tire $160 $140
Material cost per tire 80 70
Variable manufacturing cost per tire 15 12

It is anticipated that 80,000 silica tires will be sold annually, while the sales of conventional tires will be reduced by 70,000 tires annually.

  1. a. Determine the annual contribution margin for manufacturing and selling the silica- blended tires.
  2. b. Determine the annual cash flows of manufacturing and selling silica-blended tires, incorporating the impact of lost sales from conventional tires.
  3. c. Prepare a net present value analysis of the silica equipment investment, assuming an eight-year life and 12% minimum rate of return (use the Present Value tables in Appendix A). Round to the nearest dollar.

a.

To determine

Capital investment for sustainability:

Capital investment for sustainability refers to the investment which is earned maximum profit while attempting to preserve the environment, economy and future needs. There are some objectives in the capital investment sustainability as follows:

  • Minimize resource waste and environmental degradation,
  • Develop new sustainable markets,
  • Reduce litigation risks, and
  • Maintain an attractive and safe working environment.

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The annual contribution margin for manufacturing and selling the silica-blended tries.

Explanation

Annual contribution margin of silica tires is as follows:

Annual contribution margin of Silica tires
Particulars Silica tires
Sales price per tire (A)  $           160
Less:
Material cost per tire  $      80
Variable manufacturing cost per tire  $      15
Total cost per tire (B)  $   ...

b.

To determine

To determine:  Annual cash flows of manufacturing and selling silica-blended tires.

c.

To determine

To calculate: The net present value of the investment of AS Incorporation.

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